Non-Current Assets (PPE & Intangible Assets & Financial Investments)

Non-current assets
(PPE & Intangible assets &

Financial investments)
Chapter 7
Copyright ©2011 Pearson Education South East Asia. 1

Types of Non-current Assets
Plant, Property
Construction in
and Equipment
Progress
(PPE)
Investment
Intangibles
Properties

Classification of Non-current Assets
Intangible Financial
Investment
Tangible
Properties
Classification of non-current assets
(Romanian)
Asset Account Related Expense Account
(Balance Sheet) (Income Statement)
Intangile assets
Set-up cost Amortisation
Development cost Amortisation
Patents, trademarks, copy-rights, Amortisation
franchises, licences
Goodwill Impairment
Softwares Amortisation
Advances for intangible assets None

(Romanian)
Tangible assets
Land None/Impairment
Land improvements Depreciation
Natural resources Depletion
Buildings Depreciation
Equipments, machinery, installation, Depreciation
computers
Contructions in progress None

(Romanian)
Financial assets
Investment in associete companies None
Trade receivables (more 1 y) None
Other financial assets None

Determine the cost of a PPE

Measuring the Non-current assets

Measuring the Cost of a Non-
current asset - initial

Asset Costs included
Land Purchase price, commissions, survey &
legal fees, and back property taxes paid;
grading and removing unwanted buildings
Land Improvements Fencing, paving, security systems &
lighting
Building – Architectural fees, contractors’ charges,
Constructed materials, labor, and overhead; interest on
funds borrowed
Building – Purchase price, broker’s commission,
Purchased taxes paid and all costs to repair and
renovate building
Equipment Purchase price, transportation, insurance
in transit, custom tax, installation and
testing

Lump-Sum (Basket) Purchases
• Several assets purchased in a group at one price
• Total cost is allocated based on their market
values
% of
Total total
Market market market Cost of
Asset value value value Total cost each asset
Land $300,000 $3,000,000 = 10% $2,800,000 $280,000
Building $2,700,000 $3,000,000 = 90% $2,800,000 $2,520,000
Total $3,000,000 100% $2,800,000

Subsequent Costs
CAPITAL
EXPENSES
EXPENDITURES
• Increase capacity or • Do not extend
extend useful life capacity or useful life
• Cost is added to an • Maintain or restore
asset account working order
• Cost is recorded as an
expense
Distinction between the two requires judgment

Copyright ©2011 Pearson Education South East Asia.
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Depreciation
• Systematic allocation of cost of an asset over its
life
▫ Charged to Income Statement
▫ Cumulative amount charged is called Accumulated
Depreciation
• Supports matching principle

Depreciation is NOT:
Valuation
process
A fund to
replace
assets

Amounts Needed for Depreciation
Useful
Cost
life
Residual
value
Depreciable amount
Asset cost Residual value

Account for depreciation

Depreciation Methods
Straight-line
Units-of-production
Double-declining-
balance

Straight-Line (SL)
Depreciable cost
Useful life, in years
Results in equal
amount of expense
each year

Accumulated
depreciation
increases
Book value
decreases
Asset’s final book value = Residual value

Units-of-Production (UOP)
Depreciable cost
Depreciation
per unit
Useful life in units
Depreciation Activity for period

per unit (units, miles)

Double-Declining-Balance (DDB)
DDB rate Book value
Straight-line rate Cost minus

x 2 (or accumulated
2/life in years) depreciation

Residual Value: DDB
Ignored until final year
Final year Book value at the Residual

depreciation beginning final year value

DDB differences
• First-year depreciation is based on asset’s full
cost
• Final year depreciation is a “plug” amount
needed to reduce book value to residual value

Choosing Depreciation Methods
Straight-line Units-of- Double-

• Best for assets production declining-
that generate • Best for assets balance
revenue evenly that wear out • Best for assets
• Best meets because of use that generate
matching revenue early
principle in useful life

Depreciation Methods Used by 600
Companies
Units of Other
Production 2%
3%
Accelerated
6%
Straight-line
89%

Case –depreciation methods
Parish Corporation purchased a new machine for its
assembly process on January 2, 2007. The cost of this
machine was $117,900. The company estimated that the
machine would have a salvage value of $12,900 at the end
of its service life. Its life is estimated at 5 years and its
working hours are estimated at 1,000 hours. Year-end is
December 31.
Instructions: Compute the depreciation expense under the
following methods.
(a) Straight-Line.
(b) Units-of-Activity.
(c) Double-Declining Balance.
Exercise –depreciation methods
a) Straight-line
To compute straight-line depreciation, the van’s residual

value is subtracted from the cost to determine its
depreciable cost. That amount is divided by the estimated
useful life to determine annual depreciation expense.

Exercise Straight-line
Depreciable cost
$21,000
$117,900 - $12,900
depreciation
expense per year
5 years

Exercise Straight-line
Year Book value Depr. Exp. Accum. Book value

Depr.
1 105,000 21,000 21,000 84,000

2 105,000 21,000 42,000 63,000
3 105,000 21,000 63,000 42,000
4 105,000 21,000 84,000 21,000
5 105,000 21,000 105,000 0

Exercise Straight-line rate
100
100 20% ANNUAL

RATE
5 years

b) Units-of-production (activity)
To compute units-of-activity (production) depreciation, the

van’s residual value is subtracted from the cost to
determine its depreciable cost. That amount is than
divided by the total estimanted numer of miles to be
performed in its usefull life (depreciation per unit). For each
year the depreciation per unit is than multiplied by the no.
of miles traveled in that specific year, to determine the
anual depreciation

Exercise 7-19A Units-of-production
Depreciable cost
Depreciation
per unit
Useful life in units
$117,900 - $12,900
$105 per
hours
1,000 hours

Exercise Units-of-production
Depreciation Activity for period

per unit (units, miles)
Depreciation
hours expense
200 21,000
$105 150 15,750
hours 250 26,250
300 31,500
100 10,500
Exercise Units-of-production

Depr.
1 105,000 21,000 21,000 84,000

2 105,000 15,750 36,750 68,250
3 105,000 26,250 63,000 42,000
4 105,000 31,500 94,500 10,500
5 105,000 10,500 105,000 0

c) Double decline
To compute double-decline depreciation, the book value

(carrying amount) of each year is mutilplied by the double
decline rate.
The double-decline rate is the straight line rate multiplied
by 2.
The book-value in the end of the year is the book-value in
the beginning of the year minus the annual depreciation
expense

Exercise Double-declining-balance
DDB rate 2/Life in years
40% 2/5 years

Depr.
1 117,900 47,160 47,160 70,740
2 70,740 28,296 75,456 42,444
3 42,444 16,978 92,434 92,434
4 25,466 10,186 102,620 15,280 Less
than
5 15,280 6,112 108,732 9,198 residual
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Comparison of Depreciation Methods
Annual Expense
Understand additional issues related to
accounting for PPE

Issues in Accounting for PPE
Income taxes
affected by Long lives
depreciation
Alternative
Gain and losses
subsequent
on disposal of
measurement
PPE
models

Depreciation for Tax Purposes
Accelerated deprecation provides fastest tax deductions
Tax deductions decrease tax payments
Tax savings can be reinvested in business

Partial Year Depreciation
Months from date of

purchase to end of year
Annual
depreciation
12

Changing Useful Life
Remaining depreciable book value
(New) Estimated remaining useful life

Impairment of PPE
• An asset is impaired when its carrying value is
higher than its recoverable amount
• Recoverable amount is the higher of fair value less
cost to sell and value in use.

Measurement Subsequent to Initial
Recognition
• An entity elects one out of two measurement models for
each class of property
• Cost model:
• carried at cost less any accumulated depreciation and any
accumulated impairment losses.
• Revaluation model
• carried at a revalued amount, less any subsequent accumulated
depreciation and subsequent accumulated impairment losses
• fair value of asset must be able to be measured reliably

Using Fully Depreciated Assets
• A fully depreciated asset is one that has reached the end
of its estimated useful life.
• Book value is zero
• Does not mean the equipment is worthless
• Asset may be used for a few more years, but
depreciation will not be recorded
• When the company disposes of the equipment, it will
remove both the asset’s cost and its accumulated
depreciation from the books.

Analyze the effects of a PPE disposal

Disposal of PPE
• Bring depreciation up-to-date to:
▫ Measure asset’s final book value
▫ Record expense up to date of disposal
• Remove asset and related accumulated
depreciation account from books
• If asset is junked:
▫ Fully-depreciated and no residual value
 No gain or loss
▫ If not full-depreciated and/or has a residual value
 Loss equals ending book value

Selling a Plant Asset
If cash received
is greater than GAIN
book value
If cash received
is less than LOSS
book value

Exercise
On January 2, 2010, Maxwell of Michigan purchased
fixtures for $8,800 cash, expecting the fixtures to remain
in service five years. Maxwell has depreciated the fixtures
on a double-declining-balance basis, with $1,300
estimated residual value. On August 31, 2011, Maxwell
sold the fixtures for $2,900 cash. Record both the
depreciation expense on the fixtures for 2011 and then the
sale of the fixtures. Apart from your journal entry, also
show how to compute the gain or loss on Maxwell’
disposal of these fixtures.

Exercise
2/5-year life =
40% DDB Rate
Depr.
2010 8,800 3,520 3,520 5,280
2011 5,280 1,408 4,928 3,872
$5,280 x 40% x 8/12
Cash received: Book value: Loss =

$2,900 < $3,872 $972
Exercise 7-23A
JOURNAL
Date Accounts and explanation Debit Credit
Aug 31 Depreciation expense 1,408
Accumulated depreciation 1,408
Aug 31 Cash 2,900

Accumulated depreciation 4,928
Loss on sale of PPE 972
Fixtures 8,800

Account for natural resources and depletion

Natural Resources
• Include iron ore, oil and timber
• Expensed through depletion
▫ Similar to depreciation
▫ Computed like units-of-production
JOURNAL
Depletion expense
Accumulated depletion

Account for intangible assets and amortization

Intangible Assets
• No physical form
▫ Carry special rights
▫ Include patents, copyrights and franchises
• Two categories
▫ Finite lives
 Amortization recorded
 Straight-line method
 Intangible asset reduced directly
▫ Indefinite lives
 Tested for loss in value (impairment)

Accounting for Specific Intangibles
Trademarks
Patents Copyrights and trade
names
Franchises
Goodwill
& licenses

Patents
• Granted by government
• Give holder exclusive right to produce and sell
an invention

Copyrights ©
• Granted by the government
• Give holder exclusive rights to reproduce and
sell a book, musical composition, film or other
work of art
• Extend up to 70 years beyond author’s life

Trademarks and Trade Names
• Distinctive identification of a product or service
▫ Also include advertising slogans
• Useful life may be set by contract
▫ Or indefinite life
• Indicated by TM or ®

Franchises and Licenses
• Granted by private business or government
• Give purchase right to sell a product or service
with specified conditions
• Include restaurant chains and sports
organizations
• Have indefinite life

Goodwill
• Defined as the excess of the purchase price of the
company over the market value of its net assets
• Represents earning power of company
purchased
• Not amortized, but subjected strict impairment
tests
• Recorded only during the acquisition of another
company

Impairment of Intangible Asset
• Decline in asset value
• Write-down required if value of intangible
decreases below cost
▫ Reversal of goodwill impairment is not allowed
• Applies to all intangibles – both those with finite
lives and indefinite lives
JOURNAL
Impairment loss on intangible
Intangible asset

Research and Development Costs
• Costs associated with creation of intangible
assets are classified into research phase and
development phase.
• Research phase
▫ Always expensed
• Development phase
▫ Capitalized if criterias are met

Report PPE transactions on the statement of
cash flows

Plant Asset Transactions on the
Cash Flow Statement
Item Section Description
Depreciation Operating Added to net income
as a reconciling item
Sales of PPE Investing Cash proceeds from
sales of PPE - inflow
Purchase of PPE Investing Cash purchases -
outflow


Non-Current Assets (PPE & Intangible Assets & Financial Investments)

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Distinction between the two requires judgment

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Asset cost Residual value

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Useful life, in years

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Asset’s final book value = Residual value

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Depreciation Activity for period

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DDB rate Book value

Straight-line rate Cost minus

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Final year Book value at the Residual

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Straight-line Units-of- Double-

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To compute straight-line depreciation, the van’s residual

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Useful life, in years

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Year Book value Depr. Exp. Accum. Book value

1 105,000 21,000 21,000 84,000

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Useful life, in years

100 20% ANNUAL

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To compute units-of-activity (production) depreciation, the

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Depreciation Activity for period

Year Book value Depr. Exp. Accum. Book value

1 105,000 21,000 21,000 84,000

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To compute double-decline depreciation, the book value

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DDB rate 2/Life in years

40% 2/5 years

Year Book value Depr. Exp. Accum. Book value

Comparison of Depreciation Methods

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Tax deductions decrease tax payments

Tax savings can be reinvested in business

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Months from date of